As a small business owner, you may want to pay yourself last to conserve money, but sometimes putting yourself first is the trick to succeeding.
With so many business expenses to pay for your company – utilities, rent, inventory, staff wages, marketing — it can be hard to fit your own salary in. And as a business owner, you may assume you should put everything you make back into the business. Not so. The first thing you should do with your money is pay yourself first.
Many business owners who bootstrap their companies feel like paying themselves is a luxury; however, it is a necessity for the success of your business.
Why You Deserve a Salary
If you’ve got a nice cushion of savings, you may not need a salary right now to pay your bills. But that could change, so it’s best to prepare for the day when your funds run out. Getting into the habit of paying yourself, even just a little bit, will give you money for personal expenses when things get tight or the economy gets worse. If your business happens to fail one day, you would have gotten something for your efforts by paying yourself and saving money for a rainy day.
Giving yourself a salary can have tax benefits for certain business entities, as it reduces your company’s profit. Talk to an accountant to find out what benefits your tax type (LLC, partnership, corporation) has with your salary.
Other benefits to paying yourself include:
- You can save money for future business efforts or for personal use
- You will work harder to increase revenues and your income
- Investors see you are committed to growing your company
How to Build in Your Salary
Plan your salary from the beginning. When you set up your budget, include at least a small weekly, bi-weekly or monthly salary for yourself. If you’re seeking financing, having your salary built in is key, as it will increase the amount you ask for from investors. In this case, determine how much you need to live, as well as what you’re worth.
If you’re bootstrapping, start by paying yourself a modest salary, even if it’s just a few hundred dollars a week. This can increase as your profits grow. You can also pay yourself through employee benefits such as health insurance, 401K investment or loans.
When to Not Pay Yourself
There are a few instances when you can delay paying yourself:
- If you don’t have enough to pay for your employees’ paychecks or pay bills, delay paying yourself until these expenses are covered.
- If you have significant up front expenses, you can delay your compensation until all expenses are covered with money brought in from sales.
- If you have a large accounts receivable you’re waiting on, you can postpone paying yourself.
Things to Know
Make sure you record the money you pay yourself in your accounting software so that you can properly claim it when you file business taxes.Talk to an accountant if you’re unsure of how to categorize it in your accounting program.
Pay yourself a reasonable salary; if you take $500,000 annually, the IRS might flag this as a suspicious expense. Look on salary comparison sites to see what someone who does what you do gets paid.
If you’re not making enough to pay yourself, consider raising your prices to better reflect what you’re worth. Use this document to determine what rates are competitive for your industry.
You’ve achieved something great by starting a business. As an entrepreneur, you’re willing to take risks to grow your business. You deserve to be paid, just like any of your employees. Invest in yourself just like you do your small business.